Dong slumps to lowest level against dollar in past five months

One dollar now costs 22,420 dong in major banks.

The dong is coming under increasing pressure with investors betting the U.S. central bank might have to increase interest rates next month, said economist Nguyen Duc Thanh, head of the Vietnam Institute for Economic and Policy Research, on a Facebook post.

The U.S. Federal Reserve’s possible tightening of interest rates are reportedly driven by the fact that the incoming Donald Trump administration will enact an infrastructure spending plan to boost economic growth.

Market participants believe Trump’s promise to pump more money into the U.S. economy through infrastructure investments should raise inflation and lead to higher interest rates which, in turn, will strengthen the dollar as investors flock to the greenback.

Local bankers said the dong has weakened against the dollar in the past few days due mainly to a stronger dollar on the global market rather than dollar shortages.

The average daily interbank exchange rate fixed by the central bank today edged up 0.92 percent to VND22,093 per dollar from yesterday.

On Wednesday, Vietcombank, Vietnam's largest lender by market capitalization, bought the currency at 22,340 dong and sold at 22,400 dong, down 20 dong from the previous day.

Forex rates have remained stable so far this year after Vietnam’s central bank decided to ease exchange rate rules, setting the official mid-point rate of the Vietnamese dong against the U.S. dollar on a daily basis.

Vietnam previously adopted a system in which the dong was allowed to trade around a fixed rate that the central bank only adjusted from time to time.

The central bank has started responding to a weaker dong by hiking overnight rates and refinancing rates in the interbank market. Statistics show interbank overnight rate last week soared to 1.083 percent per annum from a one-month low of 0.3 percent in October.